TMI Blog2012 (2) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... ins of ₹ 1,04,51,949/-. The action of the Ld. CIT(A) in holding such loss as arising out of speculative business is grossly erroneous in law and in facts and thus the claim of the appellant in set off deserves allowance. 2. In this case, return of income was filed at ₹ 40,79,650/-. The assessee company was promoted in the year 1992 with the object of carrying on business of manufacture and inter alia flow meters and also investments in companies carrying out similar activities. In accordance with the said objective, the assessee company had an investment of ₹ 29,40,000/- in the assessment year 1993-94 in the equity shares of M/s. Liquid Controls India Pvt. Ltd. an Indian Company jointly promoted with Liquid Controls Corporation of USA wherein the assessee company had stake of 49%. During the course of assessment proceedings it has been observed by the AO that the assessee has shown long term capital gain of ₹ 1,04,51,949/- and short term capital loss of ₹ 58,29,228/-. On further examination of records it was gathered by the AO that the assessee invested in the shares of Liquid Controls Pvt. Ltd. in 1994 and it sold share of Liquid Controls Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment, it was noticed by the AO that the relevant portion of Sauda Bahi as well as demat account statement had not been furnished by the party. It was stated by the AO that from the details furnished, it was not known as to whether deals are in-house or reported to exchange. It was also found quite unusual by the AO that an assessee of Baroda was carrying out its share transaction through a sub-broker at Mumbai. The assessee by way of show cause letter was required to explain as to why loss of ₹ 58,29,228/- as claimed by it should not be disallowed as the assessee company had resorted to colourable device to avoid tax incidence. The assessee in response filed an elaborat4e reply emphasizing that the short term capital loss was genuine by contending the following: (i) The transactions were done through a member of the stock exchange and assessee was not required to follow the procedures which were applicable to members of exchange. (ii) That these transactions were not prohibited by the stock exchange authorities and that all the transactions for purchase and sales were routed through the demat account of the broker. The receipts of shares in the demat account of the bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... device and cited few decision which according to him have overruled the ratio laid down by the Hon ble Apex Court in the case of McDowell (154 ITR). The AO on the other hand had pointed out that the taxing statute must be applied to the scheme and not to the constituent transactions comprised in the scheme. In other words, an artificial tax avoidance scheme does not alter the incidence of tax. The essence of business must be there. The AO referred to following extract from McDowell case. In the context of determining whether a transaction is a sham or illusory transaction or a device or a ruse, the income tax authorities are entitled to penetrate the veil covering it and ascertain the truth. The taxing authorities are not required to put blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. In every case, where ingenuity is extended to avoid taxing and welfare legislation, it is duty to get behind the smoke screen and discover the true state of affairs. Here, as anyone can understand the essence of scheme was to include a transaction designed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding is that the purchases made by various constituents of broker member are executed in the account of the broker himself and consequently the receipt of deliveries of shares on behalf of the constituent clients in the demat account of the broker. Out of such balance available in the account of the broker if a constituent is willing to sell to another customer / constituent, the transaction is effected without effecting any deliveries to the new purchaser as the delivery of such stocks already available in the account of the broker. The broker, however, makes necessary entries in his books to record the availability of balance of stock in the demat account as now belonging to the new purchaser instead of the previous purchaser. In the financial records of the broker the necessary debits and credits are made in the accounts of respective purchaser as well as seller to reconcile with the balance available in the demat account. The broker in his records maintains all such particulars which were furnished to the AO. Similarly, it also records the particulars of persons to whom the sale is made. The corresponding bills / contracts for purchase as well as sales are issued by the broker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket transactions. Further reliance was placed on following decisions; 1. Mukesh R. Marolia Vs. Addl. CIT - 6 SOT 247(Mumbai- ITAT) 2. ITO Vs. Kusumlata - 105 TTJ 265 (Jodhpur ITAT) It was further pleaded that all the transactions are evidenced and confirmed by contracts, bills and also transaction summary showing the particulars of the seller or buyer of the stock in respect of the stock lying in the demat account of the broker and that the payments / receipts for such purchases were made by account payee cheques from time to time and hence simply because the transactions were not routed through the stock exchange and that deliveries were not taken in the account of the respective parties such transactions cannot be considered as bogus. As regards the delivery of stocks in the account of broker's demat account is concerned it was stated that the same is also a recognized method of obtaining and giving deliveries as the relationship between the client and the broker is that of a principal and agent. The assessee referred and relied on the decision of the Calcutta Tribunal in the case Smt. Jayshree Roychowdhury Vs ACIT, 93 TTJ 714. As regards the objection of the AO that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions are absolutely legal and there was no regulation requiring transfer of shares in de-met account by individual buyers / sellers. It was also added that payments for purchases and sales were received by account payee cheques from time to time. It was thus pleaded that the loss of ₹ 58,29,228/- be allowed. 4. The learned CIT(A) considering the explanation of the assessee in the light of the findings of the AO confirmed the order of the AO and dismissed the appeal of the assessee on this issue. His findings in Para 5.5 to Para 5.5.7 of the appellate order are reproduced as under: 5.5. I have carefully considered the rival submissions, the remand report and the assessment records. The factual matrix of the case reveal that the assessee company was incorporated in 1992-93 with following main objects of business as contained in Memorandum of Association of the company. i) To carry on business of manufacturers, traders, buyers, sellers, dealers, consignors, consignees, exporters, importers, agents and distributors, wholesalers and retailers of all types of flow meters like positive displacement type, turbine, magnetic, ultrasonic, mass, vortex, shedding, ventury, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions shown during the year not a single transaction has been resulted in profit to the appellant. In case the appellant had commercial interest behind trading in shares the prudence would demand that there would at least be some transactions resulting in profit. The share transactions were restricted to two brokers namely Thakkar Share Brokers Pvt. Ltd., Baroda and Labh Investments, Mumbai. The details of scrip-wise summary revealed following interest trends. i) The trading in shares commenced from July, 2001. All the transactions between the appellant and Thakkar Share Brokers Pvt. Ltd. have been between appellant and the stock broker meaning thereby these were off market transactions involving the brokers own stock in trade of the shares. ii) The transactions between appellant and Thakkar Share Brokers were in respect of following scripts. 1. Soft Solution 2. Silver Lines 3. Shyam Teli 4. PSI Data 5. Himachal Futuristic 6. Global Tele iii) Out of total purchase of ₹ 3.194 crores, ₹ 2.69 crores relate to the aforesaid shares. Uniformly, all the purchase and sale transactions led to loss. The purchase and .sale of shares show a typical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me in such transactions could be with express knowledge and awareness of the brokers involved and could be rather easier. It is not incidental that the purchase and sale of shares were resorted to only during the relevant assessment year. The entire scheme was well planned and thought out to offset the possible gain from sale of equity of Liquid Control India Pvt. Ltd. to foreign buyer. There was not a single trade in shares during the period 1995-96 to 2000-01. There was no opening stock for shares. Further the entire purchase and sale transactions during the year were squared up with two brokers in the instant assessment year. If the appellant was indeed serious in the business of trading in shares the intention would have been to make profit and hold on to certain shares or at least to carry out transactions in a manner to generate some profit in at least some scripts. The coincidence and continuous error of judgment in such share transactions appear to be too far fetched to be true. On the other hand, factors such as huge amount of intending capital gains, entering into off market transactions with two brokers, all transactions resulting into loss, long credit period allowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring logic of tax avoidance. We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd., In re and Bengal Hotels P. Limited, In re [1977] 47 Comp Cas 597 (Guj) where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. 18. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Capital Services Ltd. 96 TTJ 201 (Delhi) c) JCIT vs. Haldia Investment Co. Ltd. 85 ITD 212 (Cal) d) Khajana Holding Pvt. Ltd. vs. ACIT 17 SOT 367 (Mum) 5.5.7. In light of the foregoing the Assessing Officer was justified in rejecting the claim of loss of ₹ 58,29,228/- and in not allowing the set off of such losses against the capital gain of ₹ 1,04,51,949/-. 5. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that apart from confirming the order of the AO on merit, the learned CIT(A) also referred to terms of section 43(5) of the IT Act and explanation to section 73 of the IT Act for the purpose of rejecting the claim of the assessee considering it to be speculative transaction. He has submitted that capital gains/loss arising from the sale of shares held as investment cannot be hit by explanation to section 73 of the IT Act and referred to explanation therein to section 28 of the IT Act which provides that whether speculative business carried on by the assessee are of a nature as to constitute a business, the business (hereinafter referred to as speculative business), shall be deemed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t take the same in his cash credit. Suspicion cannot replace the real evidential document. Simply by arguing it to be a case of manipulation the revenue was not supposed to succeed in its contention without proper evidence. Holding the aforesaid view of the matter on the factual matrix the assessee s second appeal was to be allowed. The learned Counsel for the assessee referring to the above decisions also referred to the decision of the ITAT Mumbai Bench referred to in this order in the case of Mukesh R. Marolia Vs Addl CIT, 6 SOT 247 in which it was held that off-market transactions are not illegal. The learned Counsel for the assessee submitted that both the brokers confirmed the transactions to the AO on inquiries held by the AO directly from them. The brokers confirmed the transactions with the assessee; therefore, off-market transactions are not invalid or illegal and that delivery to the agent or by the agent is delivery with the assessee. No inquiry was made from the broker or concern parties. Transactions conducted by the brokers have not been disputed. Since, the brokers were holding the shares in their demat accounts so payment was not relevant as it was secured b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther, details were attached with the same confirmation. These evidences on record would prove that the broker conducted the transactions of sale and purchases of shares on behalf of the assessee. The transactions conducted by the broker on behalf of the assessee would be deemed to be conducted as conducted by the agent for the principal. Since the broker confirmed the transactions conducted on behalf of the assessee and produced all relevant evidences and material on record, therefore, there should not have been any doubt in the transactions conducted on behalf of the assessee. It is held in catena of authorities that off-market transactions are not illegal. The identities of all the persons whose names are appearing in the Sauda Bahi are also not in dispute. The entire stocks were lying in the demat account of the broker who had sufficient securities and according to the assessee the payments have been cleared later on. The transactions have not been doubted and no further inquiries have been made from M/s. Thakkar Share Brokers Pvt. Ltd. or the concerned party with whom the broker has conducted the transactions. Therefore, there was no basis left for the AO to disbelieve the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In the absence of basic documents on record it is difficult to examine and investigate the transactions carried out through this broker. The learned Counsel for the assessee referred to PB- 30, 31 and 32 which is ledger account in the books of M/s. Labh Investments and alleged details of the assessee are stated to be mentioned. However, it is a fact that no confirmation from the broker, no demat account and no copy of Sauda Bahi account, bills or contract note have been furnished in this case as were furnished in the case of other broker, M/s. Thakkar Share Brokers Pvt. Ltd. Therefore, in the absence of relevant and cogent evidence on record the claim of the assessee had been rightly rejected by the authorities below. Copy of the ledger account filed by M/s. Labh Investment would not reveal the true nature of the transactions conducted through them. The alternative contention of the learned Counsel for the assessee for remanding the matter to the file of the AO also cannot be accepted. It is an old case pertaining to assessment year 2002-03. What the assessee could not do during last several years, it cannot be expected to do now in the remand proceedings before the AO. Even, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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